Pranav B Prem

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Principal Bench at New Delhi, comprising Justice Dilip Gupta (President) and Mr. P.V. Subba Rao (Technical Member), has held that industrial sewing machines fitted with in-built motors are not entitled to excise duty exemption under Notification Nos. 6/2006-CE and 1/2011-CE. The Tribunal partly allowed the appeal filed by M/s Swarup Mechanical Works (Unit 1), upholding most of the duty demand but setting aside the extended limitation period and penalty under Section 11AC of the Central Excise Act, 1944.

Also Read: CESTAT Delhi Quashes ₹9.3 Crore Service Tax Demand Against RMS Over Vague SCN & Wrong Classification

Background

The dispute arose from two show cause notices dated 20 January 2015 and 20 May 2015, alleging that Swarup Mechanical Works wrongly claimed excise duty exemption by classifying its industrial sewing machines as “without in-built motors.” The company had cleared sewing machines meant for bag-stitching, each equipped with a motor housed within the unit. Initially, the adjudicating authority in 2016 dropped the demands, but in 2018, the CESTAT remanded the matter for fresh adjudication while keeping all issues open. Pursuant to this, an order dated 20 May 2022 confirmed a duty demand of ₹8.48 crore, along with an equivalent penalty under Section 11AC. The present appeal was filed by the manufacturer challenging the said order.

Appellant’s Contentions

The appellant contended that the sewing machines, although fitted with motors, could not be considered to have “in-built motors” since the power transmission was through a belt-and-pulley mechanism rather than a direct shaft. On this basis, they argued eligibility for exemption under the notifications.

To support this, they relied on expert opinions from the Northern India Textile Research Association (2014), CSIR-Central Mechanical Engineering Research Institute (Durgapur), and Central Manufacturing Technology Institute (Bangalore), which opined that machines using belt mechanisms should not be treated as having in-built motors. They also cited precedents including ALCO Industries (Madras High Court), Harichand Anand & Co. (CESTAT Bangalore), and Singer India Ltd. (CESTAT Delhi). Additionally, the appellant claimed that a “suspension unit with hook” used for hanging the machines during operation should be treated as part of the sewing machine and therefore eligible for exemption.

Findings of the Tribunal

The Tribunal rejected the appellant’s interpretation, holding that the exemption notifications apply only to sewing machines “without in-built motors.” It noted that each machine manufactured and cleared by the appellant contained a motor as an integral part, along with the pulley and belt, all housed within the casing. The bench observed:“Anyone buying the sewing machine would buy it as one with an in-built motor. The motor was not bought separately nor was it an optional accessory. The motor as well as the belt used to connect the motor with the sewing mechanism were parts of the sewing machine.”

Referring to the dictionary meaning of “in-built” and its understanding in common parlance, the Tribunal held that the machines clearly fell within the category of those with in-built motors. Relying on the earlier precedent in Gabbar Engineering Co. v. CCE (2009), it ruled that such machines were not eligible for exemption under the notifications. On the issue of classification of the “suspension unit with hook,” the Tribunal held that it was an optional accessory sold separately and not a part of the sewing machine. Therefore, it was not entitled to exemption under the notifications.

Extended Limitation and Penalty

While sustaining the substantive demand, the Tribunal struck down the invocation of the extended limitation period. It observed that the appellant had regularly filed excise returns under the self-assessment system, and the non-detection of duty liability was due to limited scrutiny permitted under CBEC’s trade facilitation instructions, rather than any fraud or suppression by the appellant. The bench noted: “If the non-payment of duty was not detected, it was due to limited scrutiny permitted under CBEC instructions, not because of the appellant’s intent to evade.”  Consequently, since the conditions for invoking extended limitation were not satisfied, the Tribunal also set aside the penalty under Section 11AC, which depends on the same ingredients of fraud or suppression.

Also Read: NCLAT: Forcing Litigant To Argue On Merits Without Reply To RP’s Report U/S 99 IBC Violates Natural Justice; Ex-Parte Orders Set Aside

The CESTAT upheld the excise duty demand against Swarup Mechanical Works on industrial sewing machines with in-built motors and rejected their claim for exemption under Notification Nos. 6/2006-CE and 1/2011-CE. It also ruled against the classification of the suspension unit as a part of the sewing machine. However, the Tribunal provided significant relief by setting aside the demand raised under the extended limitation period and quashing the penalty under Section 11AC.

Appearance

Counsel For  Appellant: R.K. Hasija, Advocate

Counsel For Respondent: Rakesh Agarwal

Cause Title: M/s Swarup Mechanical Works (Unit 1) V. Additional Director General DGGI

Case No: Excise Appeal No. 52049 Of 2022

Coram: Justice Dilip Gupta [President], Mr. P.V. Subba Rao [Technical Member]